Colorado's second-largest foreclosure law firm allegedly padded attorney expenses, pocketed refunds due its clients and made millions of dollars by running side companies affiliated with its foreclosure work and overcharging for it, a lawyer-turned-whistle-blower has told state investigators.

Susan Hendrick laid out over several meetings with the Colorado attorney general's office a pattern of alleged abuse and misconduct that stretched out for years at Aronowitz & Mecklenburg, the Denver law firm where she was a lawyer, according to documents unsealed in a lawsuit that would have shielded them from public view.

Meanwhile, an Aronowitz employee said in an affidavit that Hendrick admitted to coming forward with personal financial gain as her goal.

Attorneys at the firm were encouraged "to bill the client for more time than was actually spent" on foreclosure cases that homeowners contested in court, according to an affidavit filed by AG investigator Shelly-Jean Sartor, who said she met with Hendrick several times.

The firm charges a flat fee for foreclosures that homeowners did not contest but an hourly fee when they are contested, Hendrick told Sartor.

After several meetings, Hendrick texted investigators that the firm appeared to be hiding its conduct.

"It is my understanding that there is a project underway to clean up a certain problem and that includes the destruction of evidence," Sartor said Hendrick texted her in March.

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The law firm "flatly rejects and denies any allegation of inappropriate conduct," its attorney, Richard Benenson, said in an e-mail Friday.

A spokeswoman for Attorney General John Suthers refused to comment.

The unsealed documents provide a clearer picture of what Hendrick told investigators, the first details of which emerged in a Denver District Court hearing last week. Aronowitz argued to seal the case from public view, but District Court Judge R. Michael Mullins disagreed and opened the hearing. Documents in the case file were unsealed Friday.

Hendrick told investigators that other employees at the law firm told her how it improperly charged for title commitments during the foreclosure process, although the investigator's affidavit doesn't detail how.

She also told investigators that employees said the company doesn't refund client money that's advanced to county sheriffs for eviction costs, with any unspent balance later returned.

Sartor said Hendrick told her she had informed partners at the firm about her discoveries — but not about her contacts with investigators.

With regard to the alleged padding of attorney fees, firm partner Stacey Aronowitz "told Hendrick that she was 'onto something' and the law firm tries to shield attorneys from billings so that they have 'plausible deniability,' " Sartor said in an affidavit.

Hendrick said she was asked to help clear up the problems and later was offered $1,000 to sign a confidentiality agreement. She refused to sign.

Investigators say Hendrick contacted them in August 2012 after reading a Denver Post story detailing how county public trustees — the overseers of the state's foreclosure process — were asked to provide investigators with bills that attorneys had filed.

Those bills detail expenses that the lawyers say they're allowed by law to recoup. Investigators have been focusing on charges that lawyers say they paid for the posting of a pair of legal notices informing homeowners of their rights in the foreclosure process.

Investigators found the market rate to post the notices — one telling homeowners about a 90-day deferral they can apply for and the other telling them of a court hearing called a Rule 120 — is about $25 apiece. The lawyers bill up to $150 for each.

The charges are sometimes paid by homeowners if they want to "cure" the deficiency and stop the foreclosure, or by investors seeking to buy the foreclosed property at a public trustee auction.

All the firms revealed to be under investigation — Aronowitz, the Castle Law Group, Vaden Law Firm, Dale & Decker, and the Hopp Law Firm — have tried to shield some of their records from investigators, saying their content is protected by attorney-client privilege.

In denying one firm's request for attorney-client protection of its records, Denver District Judge Edward Bronfin said the privilege is designed to protect clients, not attorneys trying to hide their own misconduct.

"Unlike most attorney billing matters, the foreclosure billing process is unique because the attorney's claimed fees and costs are ultimately borne by the public, not the client," Assistant Attorney General Erik Neusch wrote in a brief to prevent Aronowitz from having the investigation sealed from public view.

Aronowitz posts its foreclosure notices using Xceleron, which is owned entirely by the firm's partners: Robert Aronowitz, his daughter Stacey and his son-in-law Joel Mecklenburg.

Investigators say Xceleron is managed by another of Robert Aronowitz's daughters, whose name is not in court documents.

Investigators also say the partners have made more than $6 million in profits in the venture since 2009, when the Colorado legislature required the postings.

Hendrick worked at the firm until April.

An Aronowitz employee said in a court affidavit that Hendrick said "she was interested in leveraging the firm for a settlement so she could pay off her student loans, fund an IRA and take some time off."

"When I pressed Hendrick that her position sounded like 'extortion,' Hendrick responded by explaining 'that's how it's done,' " Madeleine Daly said in the affidavit.

Neither Hendrick nor her attorney responded to efforts to reach them.

David Migoya: 303-954-1506, dmigoya@denverpost.com or twitter.com/davidmigoya